Carl Icahn
 

Carl Icahn grew up in Queens, New York City and went to Princeton to study philosophy. At his mother's urging he attended medical school but hated it and dropped out after two years and joined the Army. In 1961, after his stint in the Army his uncle got him a job as a trainee stockbroker with Dreyfus and Company. After he acquired some experience in stock trading he decided he should have a specialty and he became an options broker with Tessel Patrick and Company. In 1964 Icahn and his fellow options brokers moved to another broker, Gruntal, and created its options department. He started a successful newsletter called The Mid-Week Options Report.

In 1967 Icahn decided to start his own discount brokerage and borrowed $400,000 from his uncle to buy a seat on the New York Stock Exchange. Since his army days Icahn had been a committed gambler. For recreation he gambled, and at work he gambled in terms of options. He became an arbitrageur mixing options with classical arbritrage operations, something that was then unusual. About this time Icahn became notorious for being tight-fisted. He was also "notorious for his sudden rages, and for the abuse of employees, minority partners, outside lawyers." Icahn invested in REIT's (Real Estate Investment Trusts) at a time their prices were severely depressed. He gained control of one, Baird and Warner, with assets of $30 million. In 1979 Icahn won a proxy fight for Tappan, the manufacturer of stoves. He used his position on the board directors to force the sale of Tappan to a Swedish firm. Icahn made about $3 million on that venture. Icahn decided to attempt more proxy fights to sell off undervalued companies. These started as attempts to gain control companies, but he soon learned that unsuccessful proxy fights could also be profitable. Worried management groups were often willing to pay a premium for stock held by Icahn. This "buyback at a premium" came to be known as "greenmail." Hammermill Paper Company became Icahn's next target. The Hammermill management instituted antitakeover measures and fought back by conducting their own proxy campaign and suing Icahn for security law violations and fraud. Icahn lost the proxy contest and the company was not going to pay him greenmail. He negotiated a settlement that protected the management against future raids. After a year Hammermill stock rose enough that Icahn could sell his ten percent ownership at a profit of $9 million. But Icahn was constrained by his limited amount of capital. He could not buy out the companies he was investing in and their management knew it. They could call his bluff. He needed additional sources of financing. In 1982 Icahn, with the backing of several financiers, attempted a raid on the retailer Marshall Fields. Icahn had developed a reputation for unscrupulousness and Marshall Fields fought back not only with the usual allegations of securities rules violation but also it claimed violation of the RICO statute (Racketeering Influenced and Corrupt Organizations Act), a law created to deal with organized crime. Marshall Fields charged that Icahn was using funds derived from a "pattern of racketeering." This legal ploy did not stop Icahn and Marshall Fields merged with a British retailer.

After the Marshall Fields venture Icahn had about $100 million to use for raiding. He bought into Anchor Hocking, American Can, and Owens-Illinois and was bought out at a premium by management about a week after he made his purchases. His attempted raid on Dan River resulted in his gaining more of an image of an ogre when the people of Danville, Virginia came to the aid of Dan River with their retirement money. Icahn did gain control of a railcar leasing company, ACF using $410 million which he raised through bank loans and the sale of a division of ACF. Icahn had shifted his strategy from greenmail to acquisition and dismemberment of corporations. About this time Drexel Burnham contacted Icahn and offered to raise funds for him. With this backing Icahn made an $8.1 billion tender offer for Phillips Petroleum. Half of this was to be paid in cash and half in securities. Icahn limited Drexel Burnham's share of the cash financing to $1.5 billion and Michael Milken raised this in 48 hours. Icahn did not succeed in acquiring Phillips and ended taking around $25 million from Phillips as compensation of "expenses." He also made a profit on his Phillips stock acquisitions. Icahn noticed that the airline TWA, although just breaking even in terms of profit, had $200 million in depreciation so its cash flow was hefty. In 1985 Icahn started acquiring stock in TWA. Drexel Burnham discouraged him from this takeover attempt because it had done financing for TWA the previous year and had a policy of not helping takeover attempt against its own customers. Icahn was not dissuaded, and he increased his share of TWA stock ownership to 20 percent.

TWA mobilized against Icahn. The company filed numerous suits seeking injunctions. The labor unions conducted an anti-Icahn campaign. Both the union and management lobbied Congress against him.

The legal moves were blocked and TWA looked for a white knight. They thought they had found one in Frank Lorenzo of Texas Air. Lorenzo had started his career as a financial analyst for TWA and then took control of Texas International Airlines in 1972. Lorenzo had used Drexel Burnham to finance a leveraged buyout of Texas Air and Leon Black of Drexel Burnham represented him in the negotiations with Icahn. Black worked out a deal with Icahn that would have paid Icahn $95 million and given control of TWA to Lorenzo. Lorenzo tried to shave the profit Icahn was going to get by about $7 million and the deal fell through. Icahn ended up getting control. The unions at TWA were not in favor of Lorenzo getting control anyway because when Lorenzo got control of Continental he abrogated union contracts and cut wages by 50 percent. To the unions, Carl Icahn was more of a white knight than Frank Lorenzo. Icahn negotiated a deal with the unions which involved concessions on the unions' part along with profit-sharing and stock ownership. This enabled Icahn to effectively match Lorenzo's offer for TWA. Actually the sequence of bidding went like this. Icahn offered $18 per share. Lorenzo offered $23 and Icahn preferred to sell at that level. But after the breakdown of the negotiation with Lorenzo and Icahn emergence at a white knight for the unions, Icahn bid $24. Lorenzo then offered $26. Because of the bitterness toward Lorenzo felt by the employees, the Board of Directors of TWA would choose any offer that was reasonably close. The unions wanted Icahn to raise his offer to $25 but he held fixed at $24. Nevertheless the Board did accept Icahn's offer over that of Lorenzo. Icahn found himself in charge of a major airline.

Ronald Perelman
 

Connie Bruck describes the career of Ronald Perelman in a section of her book entitled "Pawns Capture Kings." This deals with the cases of individuals who were unknowns in the business world before they became associated with Michael Milken and Drexel Burnham and rose to become heads of major corporations. Ronald Perelman grew up in Philadelphia and went to the University of Pennsylvania. He completed his MBA at the Wharton School in 1966 and went to work in the managment of the small metal-manufacturing firm which his family owned. He worked in the family firm and managed the holdings of his wife until he was 35 years old. At 35 he decided to go into business for himself. In 1978 he borrowed $1.9 million to buy about a one-third interest in a jewelery distributor and retailer. Two years later, this jewelery firm under his control acquired MacAndrews and Forbes, a maker of chocolates and licorice extract for $45 million. In the same year Perelman had MacAndrews and Forbes issue $33 million in junk bonds. This was just the start. With this money Perelman set out on a campaign of acquisition. He tried but failed to buy Milton Bradley, the toy and game company. He did acquire Consolidated Cigars, Movie Labs, Technicolor, Inc., Video Corporation of America and Pantry Pride. All total these companies cost him $360 million, $140 million of which came from junk bonds marketed by Drexel Burnham. The capture of Technicolor in 1983 cost him $105 million. He paid $23 per share when the stock was selling for less than $10 per share, but it was still a major financial success. Technicolor, whose core business was in processing movie film, had tried to branch out into other fields. It had created a chain of one-hour photo processing stores which was not doing very well. Perelman sold off this chain for $20 million in cash and about $30 million in securities. He also unloaded some real estate that Technicolor owned and got $6.4 million. He then invested in the core business and Technicolor's earnings soared. In two years it had paid for itself.

Perelman then chose to take MacAndrews and Forbes private in a leveraged buyout using $95 million raised by Drexel Burnham. In 1985 Perelman acquired controlling interest (37.6%) in the grocery chain Pantry Pride for $60 million. He then set his sights on using Pantry Pride to acquire the Revlon Corporation. Revlon, a major name in cosmetics, had been created by the entrepreneur Charles Revson. It was very successful in its field and had branched out into health care products. In 1974, shortly before he died Charles Revson brought in Michel Bergerac from ITT to run Revlon. Bergerac was a urbane, courtly Frenchman with considerable experience in the world of high finance. Under Bergerac Revlon continued to prosper. When Perelman approached Bergerac with the proposition of buying Revlon he wasn't taken seriously. Generally nobody thought it was possible that the upstart Perelman could takeover a multibillion dollar corporation; nobody, that is, except Michael Milken and Ronald Perelman. Perelman tried very hard to get Bergerac to agree to his acquisition of Revlon. Perelman wanted Bergerac to continue to manage the company and made offers that would have amounted to $100 million in benefits to Bergerac and sent emissaries to convince him to go along. But Bergerac found Perelman personally disgusting and did not think Perelman could get Revlon without his cooperation. Bergerac consistently referred to Pantry Pride as "Panty Pride." He and the rest of the corporate Establishment severely underestimated Perelman's resourcefulness and the power of the Milken money machine.

Revlon stock was trading in the range of $30-35 per share and Perelman offered $42 per share. Bergerac started taking some evasive maneuvers. He had Revlon trade notes and preferred stock worth $57.50 for a quarter of the Revlon stock outstanding. He also brought in Forstmann Little to handle a management buyout. The management group made a counteroffer above Perelman's bid. Forstmann Little had access to the company records and could better judge what the company was worth than Perelman. Nevertheless Perelman went forward with his acquisition plan. He upped his offer to $47.50 per share and secured committments on the financing through Drexel Burnham. He also brought in Morgan Stanley on the deal and gave them the task of soliciting offers for the parts of the company he would sell off if he acquired it. When the management group of Revlon voted to offer $56 per share Perelman increased his offer to $56.25. Since he did not have access to the records he could not base his offer on fiancial analysis. Most of his advisors thought his $47.50 figure was too high. But Perelman reasoned that whatever his opponents could make out of the company he could do better, so he decided to top any offer they made by $0.25. Later when Forstmann Little and the management group raised their offer to $57.25 and took steps to lockout any further bidding, Perelman went to $58 per share. The courts invalided the lockout measures and Pantry Pride acquired Revlon for about $2 billion in cash and the assumption of about $1 billion in debt. After acquisition Perelman sold several of Revlon's health care divisions for $1.4 billion. Revlon also had National Health Labs and Vision Care which was worth about $1.2 billion so he got the cosmetic business of Revlon for about $400 million. By 1987 Perelman spent $500 million to buy several other cosmetics firms, such as Max Factor, to merge with Revlon and make it the biggest cosmetics company in the world.

Perelman is a shrewd businessman. Although he says that he is not a strong manangement man, he has been quite successful in using his knack for financing to strengthen and increase the value of companies he has acquired. This is in sharp contrast to the performance of others in the Milken circle such as Victor Posner.

Company after company Posner has controlled has failed either because of selfdealing or managerial ineptness. For example, in 1985 Posner took compensation of $12.7 million from a holding company he controlled which had earnings of only $5.6 million and that had losses in 1986 of $5.6 million in the first nine months of 1986. Perelman's personality is, however, a difficult thing to cope with. Connie Bruck described her experience while interviewing Ronald Perelman: "He sank low in his chair, removed his tasseled Gucci loafers, put his navy-stockinged feet up on the coffee table, and worked his cigar. The posture was casual but the man was not. He continually ground his molars. He seems to be straining to project a pleasant image--but what kept appearing from underneath...was a mix of impatience, vulgarity and boiling temper that was anything but pleasant...He raged at his secretary for taking six steps toward him to hand him a piece of paper after he had ordered her to summon Drapkin--something which required her to walk in the opposite direction. Associates say that he yells constantly at everyone who works with him. No one except for Milken, they say, is exempt. One associate remarked, "It is really pretty bad. The excuse is he can't control it."